Q:

Subject: Capital gains on sale of residence for surviving spouse?

Two questions:

I have read that a surviving spouse can retain the $500,000 capital gain exclusion on the sale of their primary residence if the house is sold in the same year of death.  Is it not within one year of death?  If not, a spouse could die in late December, making it practically impossible to qualify for the $500,000 exclusion.  I am aware of the stepped-up basis that will occur for the deceased spouse's portion of the home, but with substantial appreciation in some states, that extra $250,000 in exclusion can make a big difference for some taxpayers.

I exercised ISO's in January of this year, which will trigger AMT.  I might sale those shares before year-end, triggering a disqualifying disposition but eliminating tax preference on the ISO exercise.  Do I need to make estimated tax payments on the possible AMT tax that might occur if I do not do a disqualifying disposition?

Thanks,

A:

The maximum exclusion under Section 121 is $250,000 per person.  This means that in order to claim a $500,000 exclusion, there have to be two names on the 1040.  This is the case for the year a spouse dies, but not for the subsequent year.  If the surviving spouse does remarry and file a joint return for the year after the first spouse died, that new spouse won't be able to claim the $250,000 exclusion for the half of the home that was owned by the deceased spouse.

As you hopefully know, the preceding discussion is only important with people living in non-community property states, where only half of the accumulated gain on the residence is wiped out at death.  In community property states, all of the gain is erased.

In regard to estimated tax requirements, you should be working with your professional tax advisor to make sure you have paid in at least enough by 1/15/07 to avoid any penalty.  If your 2005 AGI was low enough, this usually means that you only have to pay in as much as your 2005 taxes were, even if your 2006 taxes turn out to be much higher.  There is no benefit to paying in more than the minimum to avoid the penalty, as long as you pay the rest by 4/16/07.

If you want to check out the rules yourself, get Form 2210 and its instructions.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thanks!

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/20/2006 09:36:00 PM Send this post: